


5WS 



VESTOR'S § 
POC KE T 
LIBRARY 






he Story of the 
Farm Mortgage 

By 

Kingman Nott Robins 



i 



i 

i 




class HGrso ^s' 

Book ~F(S% 



COPYRIGHT DEPOSIT. 



THE 

FARM MORTGAGE AS 

AN INVESTMENT 



BY 
KINGMAN NOTT ROBINS 



Reprinted from 
SCRIBNER'S MAGAZINE 



Copyright, 1919, by Charles Scribner's Sons 










©CU536132 



CONTENTS 

PAGB 

The Farm Mortgage as an Invest- 
ment 1 

How Sound Farm Mortgages are 
Made 12 

Various Forms of Farm Mortgage 
Security 23 

The Farm Mortgage Bankers' As- 
sociation . . 32 



FOREWORD 

The articles which form the con- 
tents of this booklet originally ap- 
peared in the Investment Depart- 
ment of Scribner's Magazine for the 
purpose of giving to those unfamiliar 
with the farm mortgage as an in- 
vestment a clear statement in sim- 
ple language of the fundamentals of 
this type of security. 

Technical details and much in- 
formation of value to close students 
of the subject are purposely omitted 
in the interest of brevity and the 
convenience of the busy reader. 
These articles, as they stand, how- 
ever, are quite sufficient to guide the 
investor in making farm mortgage 
investments. There is no reason why 
any person, no matter how unin- 
formed otherwise in investment prac- 
tice, should not avail himself of the 
safety and liberal interest return 
which are the greatest attractions of 
the farm mortgage. 

[v] 



Although the farm mortgage has 
for half a century been known as a 
favorite investment of insurance 
companies, savings banks, colleges, 
trustees, and individual investors, 
very many persons have felt that 
they did not possess the necessary 
facilities and knowledge to make 
farm loan investments safely. 

Nothing can be farther from the 
truth, for no investment is simpler 
of understanding, can be more easily 
investigated, or can be made with 
greater reliance on the recommenda- 
tion of the negotiating house. It is 
as admirable a form of security for 
the inexperienced investor as for the 
expert. 

In these days, too, when we are all 
thinking a little more seriously than 
before of public service and the value 
to the community of our enterprises, 
it is worth remarking that no in- 
vestment serves a more important 
need than the farm mortgage. There 
are estimated to be about $4,000,000,- 
000 worth outstanding, and they are 
the backbone of the farming indus- 
try; without the farm mortgage the 
great agricultural production of the 

[vi] 



United States, on which we all de- 
pend for our living directly and in- 
directly, would collapse. 

It is, therefore, of the greatest 
importance for our welfare as a na- 
tion that investors understand agri- 
cultural finance and do their share 
as partners in the agricultural indus- 
try of the United States. No indus- 
try pays surer or better earned divi- 
dends. 



[vii] 



THE FARM MORTGAGE AS 
AN INVESTMENT 

OVER half of the moneys in the 
savings banks and trust com- 
panies of the State of Ver- 
mont are invested in "farm loans" 
— mortgages on farms in the South 
and West. The late bank commis- 
sioner of Vermont states that in the 
ten years that he was commissioner 
there was only one loss on a farm 
loan, and in that case it was the title 
that was wrong through the dishon- 
esty of an agent and not a deficiency 
in the security. 

The life insurance companies hold 
over $800,000,000 of farm loans. 
There is hardly a company of im- 
portance that has not a considerable 
holding of these securities, and one 
large company puts all its money 
into them. Thus every policy holder 
is to some extent already an in- 
vestor in farm loans. 
[i] 



There are somewhere in the neigh- 
borhood of $4,000,000,000 of farm 
loans altogether, secured by farms in 
the United States. Evidently the 
business of financing the farmer is 
an important one, and his credit is 
obviously good with the most con- 
servative investors. There is every 
reason why the farm loan should be 
a safe investment, for it is the per- 
sonal obligation of the best type of 
citizen we have in this country, and 
is secured by a first lien or charge 
not only on the borrower's home but 
on his means of making a living. A 
farmer will take care of his mortgage 
ahead of every other debt, because 
he must. If he fails to do it, the 
holder of the mortgage gets the farm, 
at half price or less, and in these 
days a farm at half price is about the 
easiest collateral to dispose of that 
there is. 

There is, therefore, no security of- 
fered the investor to-day that is 
based more nearly on bed-rock se- 
curity that cannot be destroyed or 
run away or depreciate below the 
value of the investment. 

"There is," as the bank commis- 

[2] 



sioner of Vermont says, "no better 
investment for our savings than a 
farm loan, properly placed and prop- 
erly looked after. 5 ' 

THE FARM MORTGAGE BANKER 

"Properly placed and properly 
looked after" — that phrase sums up 
the business of the farm mortgage 
banker — the individual, firm or cor- 
poration that makes a business of 
bringing together the farmer who 
wants to borrow and the person who 
wants to invest. These farm mort- 
gage bankers, some of them, have 
been in business for thirty, forty, 
fifty, and even sixty years, without 
allowing their clients to lose a cent 
of principal or interest, and there 
ought not to be any losses if they 
know their business and manage it 
properly, for the worst that can hap- 
pen to a farm mortgage is a foreclo- 
sure, and if the loan was properly 
placed there will not be any loss. 

The business of farm mortgage 
banking, like other businesses, is the 
product of a gradual growth and de- 
velopment. One of the first houses 
in the business started with the close 

[3] 



of the Civil War, in connection with 
the financing of the purchase of rail- 
way lands in the West. The farmers 
who bought these lands had not 
enough money to complete their 
purchases, and so the business of 
getting loans for these farmers from 
Eastern investors grew up. In the 
'70s the business began to expand 
and became so popular in the '80s 
that it was overdone. The condition 
of overexpansion was aggravated by 
the presence in the field of many un- 
scrupulous concerns and a lack of 
standardized methods. Like every 
other mushroom business, the farm 
loan business went on the rocks un- 
der the pressure of the hard times of 
the late '80s and early '90s. The 
companies which were well managed 
on proper principles, however, carried 
their investors through without a 
loss, and many of them are leaders in 
the business to-day. It is to be re- 
membered, too, that many of the 
best railway, corporation, and even 
municipal securities defaulted in the 
same period, over one-half of the 
country's railway mileage being in 
the hands of receivers. 

[4] 



STANDARDIZED AND SYSTEMATIZED 

Since that time the farm mortgage 
banking business has been stand- 
ardized and systematized until there 
is no investment banking business 
to-day on a sounder and surer foun- 
dation. The service of the farm 
mortgage banker begins with the 
negotiation of the loan. It is his 
business to know everything there is 
to know about land values, farming 
conditions, market conditions, cli- 
mate, rural population, and all the 
other factors that affect land security 
in his field. Presumably he has not 
only from ten to forty years' experi- 
ence with these things, but a mass 
of classified statistics, field maps, 
systematically arranged records of 
land sales and values, etc., that give 
him a specialist's skill in appraising 
the security for loans. He, more- 
over, is not content with having 
sufficient physical security. He in- 
sists, also, on the farmer being 
thrifty and prompt in meeting his 
obligations. He wants to loan to a 
man who will make money out of 
his loan. For modern farm mortgage 
[5] 



banking is like all good banking — 
the making of a good bargain for 
both parties. The mortgage of the 
melodramatic stage has no place in 
present-day mortgage banking, and 
the investor in farm mortgages need 
have no fear that he is particeps 
criminis in "grinding the faces of the 
poor." 

SERVICE TO INVESTORS 

The service of the farm mortgage 
banker does not stop with the mak- 
ing of the loan, the completion of the 
papers in proper form, and the resale 
of the completed mortgage to an in- 
vestor. The farm mortgage banker 
figures that the commission he re- 
ceives from the borrower not only 
pays for getting the loan from an 
investor— it must also compensate 
him for keeping that loan good and 
satisfactory to the investor as long 
as it is on the books. For the farm 
mortgage banking business makes 
its money not out of the first com- 
missions but out of the commissions 
on reinvestments, and unless the in- 
vestor is satisfied there will not be a 
reinvestment and hence no profit. 

[6] 



If a motive of self-interest is sought 
for the remarkable record of service 
to the investor which so many farm 
mortgage banking houses have, it is 
to be found in the necessity the busi- 
ness is under of keeping its investors 
satisfied year in and year out. 
To give this satisfaction the farm 
mortgage banker sees to it that in- 
terest and principal reaches the in- 
vestor promptly, that taxes and in- 
surance premiums are kept paid, 
that the investor shall, in short, have 
no bother whatever in connection 
with the investment. Then, when the 
loan matures a new loan or a re- 
newal is provided, so that there is 
no lapse of interest. An investment 
in a farm mortgage may therefore be 
either a short-term or a long-term 
investment, at the investor's plea- 
sure. "He may eat his cake and have 
it too." 

SELECTING YOUR BANKER 

This service of the farm mortgage 
banker is so important, from the 
standpoint of both safety and con- 
venience, that it may well be con- 
sidered the equivalent of 1 per cent 

[7] 



or 2 per cent additional interest. It 
would certainly cost the investor 
more than this amount to provide 
equal service if he were to make his 
own loans without the assistance of 
the banker. So the first thing for the 
prospective investor in farm loans to 
do is to form connections with a good 
farm mortgage banking house. 

In choosing his banker or bankers, 
if he wishes to diversify his invest- 
ment, he should assure himself that 
the concern has: 

1. Several years' experience, either 
as a concern or in the person of its 
management, in farm mortgage bank- 
ing, and preferably in the field where 
the loans are being made. 

2. That the men who manage the 
affairs of the concern are of high per- 
sonal standing in the community. 

3. That the financial condition of 
the concern is good and the capital 
sufficient to make good the obliga- 
tions it assumes. 

A personal acquaintance with the 
concern is desirable, if possible, and 
it is worth a little time and expense, 
certainly, to invest advantageously 
and safely the savings of years of 

[8] 



effort. When the investor has chosen 
his banker, let him select loans from 
the banker's offerings that do not 
exceed 40 or 50 per cent of the value 
of the land, apart from the improve- 
ments. There are numerous other 
qualities of a good loan, but the 
novice in farm loan investing can 
safely leave the matter of choice on 
these points to the banker. 

SUMMARY OF UNIQUE INVESTMENT 
FEATURES 

To sum up, the investor in a farm 
mortgage bought from an approved 
farm mortgage banker gets, among 
other desirable features, in his in- 
vestment : 

1. Security as nearly absolute as 
is obtainable. 

2. A fair fixed rate of income from 
5 per cent to 6 per cent. 

3. Investment for a comparatively 
short term — usually five years — giv- 
ing him the opportunity to rear- 
range the investment or use the 
money to reinvest as he chooses, at 
periodical intervals. This is in ac- 
cord with the best modern practice 
in investing. By investing equal parts 

[9] 



of his investment fund each year for 
five years in five-year maturities, 
the investor will have one-fifth of his 
loans maturing each year and there- 
fore subject to his readjustment 
every year. There need be no lapse 
of interest, if he wants to keep his 
money invested in the same secur- 
ity, but on the other hand, if he 
does not, it is possible every year to 
take advantage of any special op- 
portunity or meet any emergency. 

4. An investment entirely free of 
care. 

5. An investment entirely free of 
speculative quality. It preserves the 
principal absolutely intact, return- 
ing 100 cents on the dollar every five 
years. 

6. An investment adapted to both 
the small and the large investor — the 
nest egg of $500 and the fortune of 
$1,000,000 or more. The farm mort- 
gage investment is adapted to the 
needs of the individual investor, the 
trustee, the endowed institution, the 
bank, and the insurance company, in 
varying proportion to their entire 
funds as their special circumstances 
dictate. 

[10] 



A SERVICEABLE INVESTMENT 

The least that can be said is that 
no investor can afford to be ignorant 
of what the farm mortgage is and full 
information is readily obtainable. It 
is a particularly appropriate invest- 
ment at the present time, for two 
reasons at least: 

1. It is based on the industry that 
is probably least likely to be radically 
disturbed by changing political, in- 
dustrial, and social conditions. 

2. It is distinctly an instrument 
serviceable to the country because 
essential to the continuance and de- 
velopment of the largest and most 
important industry in the country. 



Hi] 



HOW SOUND FARM 
MORTGAGES ARE MADE 

STANDARD methods and or- 
ganization are perhaps more 
universally in use in the farm 
mortgage banking business than in 
any other field of investment secur- 
ity negotiation for the reason that 
they are based on a continuous ex- 
perience of over half a century in 
the case of the oldest houses in the 
business, and because wherever the 
farm mortgage is negotiated similar 
methods and equipment are required. 
They are accepted as fundamental to 
good loaning practice whether the 
loan be for $500 or $500,000 and 
whether it be located in Iowa, Geor- 
gia, Montana, or elsewhere. 

Of the $4,000,000,000 of outstand- 
ing farm mortgages in the United 
States there are many million dollars' 
worth that were not negotiated in 
conformity with this standardized 
practice. They were the result of 
[12] 



simple and direct borrowing and 
lending transactions between banks 
and their customers, and between 
individuals, where much was taken 
for granted and the rest was known 
to the contracting parties without 
special investigation. 

But to the ordinary investor in 
farm mortgages these informal trans- 
actions are not of interest. He is 
concerned only with the purchase of 
a standardized investment security 
complying in every respect with the 
requirements of safe investment and 
so negotiated that he can buy these 
securities like any other product, 
"over the counter," without personal 
knowledge, and at a distance, on the 
strength of the representations made 
by the negotiating house, and be- 
cause of the service that house will 
render him and the protection it will 
offer him on all mortgages bought 
through that house. 

It is the standardized farm mort- 
gage that is the favored investment 
of the great life insurance companies, 
of the savings banks of Vermont and 
the Middle West, and of multitudes 
of conservative individual investors. 

[13] 



This standardized farm mortgage 
can be purchased only from the 
farm mortgage banking houses that 
are organized and equipped especially 
for that business, or from the ac- 
credited representatives of those 
houses. The farm mortgage banking 
business is as much a specialty as the 
business of the houses originating 
issues of municipal bonds or cor- 
poration bonds, and has nothing in 
common with mortgage negotiations 
of the lawyer or broker or other in- 
dividual with whom the business is 
occasional and who does not stake 
his entire reputation and business 
prosperity on every loan he makes- 
It is this great and permanent sense 
of responsibility for every negotia- 
tion which is the impelling motive of 
every true farm mortgage banker in 
keeping him up to the mark in the 
use of every precaution and safe- 
guard, and which has produced these 
standardized methods. His clients' 
interests are his own, for a bad loan 
means that either the house or the 
client must lose, and the house in- 
variably would prefer to lose money 
on a loan rather than lose its reputa- 

[14] 



tion, for its reputation is its stock in 
trade. Without reputation it cannot 
do business. It can better afford in- 
solvency than a dissatisfied cus- 
tomer. 
There is, therefore, nothing of the 
caveat emptor doctrine in the relation 
between the investor and the farm 
mortgage banking house. 

STANDARDIZED METHODS 

What, then, are these standardized 
methods which have been adopted 
for the protection alike of the in- 
vestor and the farm mortgage bank- 
ing house? Briefly, the process of 
farm mortgage banking consists in: 

1. Finding the farmer who needs 
money for a productive purpose 
which should properly be financed by 
a long term loan. 

2. Determining whether or not this 
farmer will make good use — a busi- 
nesslike use — of the borrowed money. 

3. Determining how much of a loan 
can safely be made on the security 
offered. 

4. Creating a good and sufficient 
first lien for the right amount on the 
security offered. 

[15] 



5. Completing the loan with the 
farm mortgage banking house's own 
funds, and bringing all papers in the 
transaction to completion. 

6. Finding an investor with funds 
to purchase this loan, thus releasing 
the funds of the house for the next 
transaction. 

7. Continuing to care for all mort- 
gages negotiated for their entire 
term as carefully as though they re- 
mained the property of the house. 

This outline may seem to do scant 
justice to the manifold functions and 
services of the farm mortgage bank- 
ing house, but is thus simplified to 
make the process clear. For the same 
reason, the methods adopted by a 
typical farm mortgage banking house 
to carry out this process must be 
very briefly sketched. 

In the first place, the loaning field 
was selected on the basis of careful 
systematic study of the various con- 
ditions affecting the agriculture of 
the field, extending over a long term 
of years, and the judgment of the 
house in estimating the effect of these 
conditions on its securities is based 
on full consideration of past, present, 

[16] 



and prospective factors. Here, as 
throughout the business, special 
training and long experience are the 
foundation of sound loaning prac- 
tice. 

THE COURSE OF A FARM LOAN 

The course of a loan from initiation 
to sale in completed form may be 
traced as follows: 

A farmer wishing a loan goes to the 
nearest representative of the farm 
mortgage banking house (who may be 
a local bank, loan agent, lawyer, mer- 
chant, or farmer) and makes out his 
application on a form supplied by the 
house, on which he answers a great 
variety of questions designed to 
bring out his personal qualities as a 
farmer and, business man, and to 
show what his equipment and re- 
sources are, and whether or not he 
seeks to borrow for a legitimate busi- 
ness purpose. The application de- 
velops information also regarding the 
physical security, but this is chiefly 
for comparing the borrower's esti- 
mates of the value with the valua- 
tions of the house's own appraiser. 

The applicant agrees to pay a given 

[17] 



rate of interest plus a commission. 
Out of such commissions come the 
expenses of negotiating and investi- 
gating each loan, the cost of main- 
taining the office and entire organ- 
ization, and the small profit to the 
house. 

If this application appears to the 
local correspondent of the house 
likely to be acceptable, he makes out 
his own report on another blank fur- 
nished by the house, based on his 
personal knowledge of the applicant 
and the security, and sends in the 
application and report. Approval is 
conditional on the confirmation by the 
house's own salaried appraiser of the 
representations on which the applica- 
tion was accepted. This independent 
inspection of tfie security by the com- 
pany's own appraiser may come be- 
fore the loan is closed or afterward, 
but afterward only in cases where the 
local correspondent is responsible 
and under contract to take up any 
loan the security for which is not 
found to be as represented. The point 
is that no loan is finally placed on the 
books of the house until the security 
has been carefully appraised and 

[18] 



checked by a disinterested person 
expert in this work. 

Standard practice is to loan not 
more than 40 per cent of the value 
of the land alone in the newer sec- 
tions, nor more than 50 per cent in 
the best developed sections. 

When an application has been ac- 
cepted the papers are made up on 
forms provided by the house, which 
have been drawn by the best legal 
counsel available, the title is passed 
upon by title attorneys, and after 
the title and papers have been com- 
pleted and passed by counsel for the 
house they are recorded as a first 
lien against the security, and the 
loan completed with the funds of the 
house. The completed papers then go 
to the head office, where a complete 
record is made, and the completed 
mortgage security turned over to the 
sales department for sale. 

The sales department offers the 
mortgage for sale in circulars issued 
to investors through the mails and 
through the agency of its personal 
representatives, including salesmen 
attached to the head office staff, the 
managers of the branch sales offices, 

[19] 



and special representatives whose 
compensation is a small brokerage. 
This effort is supported by general 
advertising in magazines and news- 
papers. 

THE BANKER'S SERVICE 

After a mortgage is sold the house 
continues to carry it on its books 
and, in behalf of the investor, to col- 
lect interest, see that taxes and in- 
surance are paid, that changes of 
ownership are recorded and investi- 
gated, and to keep in touch with 
general conditions surrounding the 
security. The house follows the usual 
custom with farm mortgage banking 
houses and advances interest to the 
investor on the date due in its own 
check, to save the investor the an- 
noyance of slow collections. If the 
mortgagor defaults, the house offers 
the investor a new loan in exchange 
for the one in default, or buys it 
back, as the investor prefers. This 
service is not guaranteed but is a 
matter of custom. On this basis no 
investor has ever waited a day for 
principal or interest due on any 
loan. The house has even been able 

[20] 



to anticipate the payment of prin- 
cipal on all loans which its clients 
have wished to liquidate before or at 
maturity, thus making this house's 
farm mortgages a readily convertible 
investment. The house has been able 
to do this because its farmer bor- 
rowers have every year voluntarily 
paid back principal much in excess 
of the requirements of its investors 
for the return of their principal. In 
this experience and practice the 
house is by no means unique, but 
rather typical of the better class of 
farm mortgage banking houses. 

COMPILATION OF VALUABLE 
STATISTICS 

Finally, it should be added, this 
standardized method of negotiating 
and selling farm mortgage invest- 
ments is carried out by men expert 
in each department, and especially in 
appraising land security, judging the 
moral hazard and estimating the 
general conditions affecting the busi- 
ness in the field as well as in the 
market. This special knowledge is 
kept up-to-date by systematic prep- 
aration and study of crop reports, 

[ 21 ] 



field notes, immigration statistics, 
data on the development of the 
field by new railways, highways, in- 
creased settlement, etc., market 
prices and facilities and all the mul- 
titudinous factors in a sound judg- 
ment of the course of land values 
and development. Such study and 
knowledge become the expert "loan 
man's" second nature, and the in- 
vestor, after he has satisfied him- 
self regarding the general character 
of the house with which he is dealing 
may safely trust his money to be in- 
vested by these experts in this 
proved, methodical manner, and to 
be cared for by men who value their 
reputation more than their dollars, 
even if for no other reason than that 
the former is necessary to the latter. 



[22] 



VARIOUS FORMS OF FARM 
MORTGAGE SECURITY 

THE best-known forms of farm 
mortgage security, as negoti- 
ated and offered by farm 
mortgage bankers, are: 

1. The Individual Farm Mortgage. 

2. The Divided Mortgage. 

3. The Farm Mortgage Bond. 

4. The Debenture or Collateral 
Trust Bond or Certificate. 

In addition to these forms of farm 
mortgage security there are the is- 
sues of the institutions created by the 
Federal Farm Loan Act, known as: 

1. Federal Farm Loan Bonds. 

2. Joint Stock Land Bank Bonds. 

THE INDIVIDUAL FARM MORTGAGE 

The individual farm mortgage is 
the original form of farm mortgage 
security and is the form most gen- 
erally found to-day. It has the ad- 
vantage of placing in the hands of 
the investor all papers constituting 
the promise to pay of an individual 
farmer, secured by the first lien on 
this farmer's individual farm. It 
represents a simple, direct transac- 
ts] 



tion, all steps in which can be readily 
followed and checked by the investor 
or his agent, and it has the advan- 
tage, unique among all investment 
securities, of giving the investor sole 
control of the security. In case of 
default, he has sole power and dis- 
cretion, and need not consult or de- 
pend on the action of trustees, fel- 
low investors, or "protective' 5 com- 
mittees, as he must if he invests in 
stocks or bonds. 

The individual farm mortgage se- 
curity may take the form of the 
farmer's note or bond, secured either 
by "first mortgage," "trust deed/' 
or "deed to secure debt," depending 
on the laws of the State in which the 
security is located; but in any of 
these forms the status of the security 
is in effect similar, giving the in- 
vestor a direct hold on both the 
physical and the personal security 
for the full amount of the investment 
and all costs of collection, if legal ac- 
tion should be necessary. 

If individual farm mortgages were 
always obtainable in amounts suited 
to the needs of all investors, both 
large and small, there would be no 

[24] 



occasion to devise any other form of 
farm mortgage security. But the fact 
that few investors are able or willing 
to put over $5,000 or $10,000 into a 
single mortgage, and the fact that 
few mortgages are available in small 
amounts, such as $500 and $1,000, 
have led to attempts to split up the 
investment in the larger mortgages 
into amounts convenient for the 
ordinary investor. In this way farm 
mortgages securing loans running 
into the hundreds of thousands are 
made available to the modest in- 
vestor or the investor who wants to 
diversify his holdings by refraining 
from putting large sums into any one 
mortgage. 

THE DIVIDED FARM MORTGAGE 

The commonest method of dividing 
large loans is to take a series of notes 
from the borrower in convenient 
denominations, usually multiples of 
$500, secured by a single deed of 
trust in favor of an individual or 
corporation as trustee for the note- 
holders. The fact that the pledge of 
the farm is held by the trustee for 
the benefit of the note-holders is 

[25] 



endorsed on each note, and the notes 
are sold to investors in amounts 
suited to their requirements. There 
is no distinction between an invest- 
ment in these notes and an invest- 
ment in an entire mortgage, except 
that the trustee instead of the in- 
vestor holds the security for the 
notes, as would be the case in a cor- 
poration bond issue, and the trustee 
in case of foreclosure would enforce 
collection. Inasmuch as the pur- 
chaser of a standardized farm mort- 
gage from an established farm mort- 
gage banking house relies on the 
house to protect his interests in any 
case, there seems to be no reasonable 
objection to allowing a trustee to 
administer the security. The in- 
vestor has a very simple and con- 
venient security to hold and can 
avail himself of the choicest farm- 
mortgage security in any amount 
convenient for him. 

As land values increase in the better 
loan fields, the size of individual 
farm mortgages increases with them, 
and it is very difficult to invest sums 
of less than two or three thousand 
dollars in good individual farm mort- 

[26] 



gages. The split mortgage is a nat- 
ural and safe device to meet this 
situation and to give investors ex- 
actly the denominations they want, 
from $500 upwards. 

THE FARM MORTGAGE BOND 

The farm mortgage bond is in prin- 
ciple practically the same as the 
divided mortgage, but is often put 
out more in the form of a corporation 
bond. Take for example an offering 
of $300,000 of first mortgage 6 per 
cent bonds, secured by first lien on 
$818,675 worth of improved farm 
land, operated as a unit by manage- 
ment of proved capacity, and with 
liquid assets exceeding the amount of 
the loan. These bonds are in denomi- 
nations of $100, $500, and $1,000, 
are secured by trust deed to a prom- 
inent trust company, are registrable 
as to both principal and interest, and 
are in bearer coupon form, with in- 
terest and principal payable in New 
York. In every particular these bonds 
are like the standard corporate is- 
sues, the trust deed containing all 
the elaborate protective clauses com- 
mon to carefully drawn corporation 

[27] 



mortgages, and prepared and ap- 
proved by expert counsel. 

These bonds have behind them the 
best of physical security, the per- 
/ sonal obligation of a millionaire 
farmer, the^best of legal advice, and 
the service of a well-known trust 
company, and yet they can be had 
in amounts as low as $100. In their 
case, as in the case of the divided 
mortgages, the only distinction as 
compared with an individual farm 
mortgage is that the trust company 
and not the investor holds the trust 
deed, and is responsible for seeing 
that, in case of default, its provisions 
are enforced. The great advantage 
of both the divided mortgage and 
the farm mortgage bond is that they 
offer the investor of comparatively 
small sums the security of the most 
successful farmers and the best 
farms. They are, for that reason, and 
because of their convenience, steadily 
gaining in favor. 

THE DEBENTURE OR COLLATERAL 
TRUST BOND 

The debenture or collateral trust 
bond is characteristically the obliga- 

[28] 



tion of a corporation dealing in farm 
mortgages, secured by the deposit 
of farm mortgages of equal or greater 
face value with a trustee as collateral 
security for the obligation. The de- 
benture is the customary type of 
farm mortgage investment in Great 
Britain and Europe. Several of the 
important British and European 
companies maintain loaning agencies 
in the United States and put United 
States mortgages behind their de- 
bentures. In Canada, and in some 
instances in Great Britain and Eu- 
rope, the debenture is not secured by 
such definite deposit of collateral, 
but is a lien on the general assets of 
the issuing corporation, and the de- 
benture issues are restricted to an 
amount bearing a fixed ratio to the 
paid-in capital, surplus, and reserves. 
In Canada such debentures are in 
the best of favor, are legal invest- 
ments for trustees, and there has 
been no loss to investors through 
default in over forty years' experience 
among all the companies operating. 
The Canadian experience has demon- 
strated that debentures of properly 
regulated companies partake of all 

[29] 



the advantages of safety and regular- 
ity of prime farm mortgages; but, 
owing to the unfortunate experience 
of investors in the United States a 
generation ago, with the debentures 
of unregulated companies, there is a 
strong prejudice against this form in 
this country. As a result there are few 
debentures offered on the United 
States market, although if issued 
under proper regulation and safe- 
guards they are, theoretically at 
least, the safest and best of all forms 
of farm mortgage investment. 

FEDERAL FARM LOAN BONDS AND 
JOINT STOCK LAND BANK BONDS 

There has been so much publicity 
regarding these issues of the institu- 
tions operating under the Federal 
Farm Loan Act that they are quite 
familiar to the public. Indeed, they 
are probably better known in the 
Eastern market than other forms of 
farm mortgage investment, although 
as yet these issues constitute little 
more than 4 per cent of the out- 
standing farm mortgage business of 
the country. The provisions of the 
law governing these issues are com- 

[30] 



plicated, and investors are referred 
to the law itself and to the opinions 
of those experienced in rural bank- 
ing, especially farm mortgage bank- 
ing, for information on the nature of 
these investments. 
In comparing the interest rate 
available on the issues of the Federal 
Farm Loan Banks and of the Joint 
Stock Land Banks with interest rates 
available on standardized farm mort- 
gages negotiated and sold by farm 
mortgage banking houses, it should 
be borne in mind that the securities 
of the Land Banks are totally tax 
exempt. The market for these bonds 
is fixed by the demand on the part of 
wealthy investors who value the tax 
exempt privilege. 



[31] 



THE FARM MORTGAGE 
BANKERS' ASSOCIATION 

THIS discussion of the farm 
mortgage as an investment has 
reference always to the stand- 
ardized farm mortgages negotiated 
and sold by farm mortgage banking 
houses. Mortgages which are the re- 
sult of direct negotiation between 
lender and borrower, or through the 
agency of lawyers, brokers, or others, 
who do not put behind every mort- 
gage the skill, reputation, and finan- 
cial responsibility of the best farm 
mortgage banking houses, are not of 
this standard character. 

The investor who buys farm mort- 
gages from a reputable banker gets 
not only security and a good interest 
return, but he also gets service ren- 
dering him free from the details 
necessary to the proper care of mort- 
gage investments. 

The development of the business of 
making and selling these standard- 

[32] 



ized farm mortgages has largely been 
in the last twenty years, although 
there are representative houses which 
were founded in the '60s and '70s. 
The business has grown up in a 
quiet way, based on relations of per- 
sonal acquaintance and confidence 
between the investor and the farm 
mortgage banking house, until it has 
reached proportions comparing with 
the business in railway bonds, cor- 
poration bonds, and municipal bonds, 
but without impressing itself in any 
commensurate measure on the gen- 
eral public. 

The insurance companies have ever 
since the '70s been steadily increas- 
ing their investments in standardized 
farm mortgages until their total in- 
vestment in them aggregates nearly 
$1,000,000,000, or about one-fourth 
the total mortgage indebtedness of 
the United States. 

The popularity of the farm mort- 
gage has greatly increased in the last 
few years, with the inevitable result 
that the business before the war was 
in some danger of exploitation in the 
hands of certain inexperienced and 
sometimes unscrupulous persons, at- 

[33] 



tracted by the ready market for such 
securities. 

A growing self-realization and feel- 
ing of solidarity on the part of the 
strong and experienced houses en- 
gaged in the business led to the or- 
ganization, on May 7, 1914, of The 
Farm Mortgage Bankers 5 Associa- 
tion of America, for purposes ex- 
pressed in the Preamble of the Con- 
stitution, as follows: 

"In the belief that the formation of an as- 
sociation of individuals and corporations 
dealing in farm mortgage loans will in gen- 
eral promote their welfare and extend their 
influence, and, specifically, accomplish this 
desirable object by (1) encouraging in- 
telligent legislation affecting the business; 
(2) acquiring and disseminating correct in- 
formation regarding the business; (3) aid- 
ing public discrimination between such se- 
curities and dealers therein as should com- 
mand confidence and those who should not; 
(4) securing uniformity of practice where 
uniformity is desirable; (5) affording op- 
portunity for those engaged in the business 
to secure the benefits of personal acquaint- 
ance and interchange of ideas, both by in- 
dividual contact and public discussion, and 
in various other ways, not herein enumer- 
ated, we submit below a form of Constitu- 
tion and By-Laws for such an organiza- 
tion." 

[34] 



The association now includes in its 
membership over 200 leading farm 
mortgage banking houses. The re- 
quirements for eligibility to mem- 
bership define farm mortgage bank- 
ing as the negotiation of farm mort- 
gage loans by standard methods, and 
with the negotiator's own funds. 
This means that the true farm mort- 
gage banker does not casually or 
occasionally negotiate a loan, but is 
organized and equipped to negotiate 
farm loans as his regular business, 
that he has standardized his methods 
to that end, and brings his loans to 
completion with his own money. He 
then offers these loans for sale ac- 
companied by the service and pro- 
tection that are standard with such 
houses. 

To be eligible for membership, the 
house applying must have a capital 
invested in the business of at least 
$25,000, this low figure being fixed to 
include a number of small State 
banks in the West which do a small 
but thoroughly safe business. The 
houses of national scope have much 
larger capital, as a rule. A more im- 
portant qualification is that the ap- 

[35] 



plicant's personal character and busi- 
ness trustworthiness must be vouched 
for by at least two member houses, 
investigated by the secretary of the 
association and passed on by the 
Board of Governors. 

In these qualifications for mem- 
bership lies the association's first 
great service to the investor. He 
knows that every member house has 
been investigated and found to be a 
legitimate farm mortgage banking 
house in good standing. Membership 
in the association should not take 
the place of a careful investigation by 
the investor of the banker through 
which he expects to make mortgage 
investments, but it at least presup- 
poses a satisfactory outcome of such 
an investigation, and thus gives the 
investor, in the list of members, a 
good working basis for establishing 
connections with the best houses in 
their respective fields. 

The association not only serves the 
investor in scrutinizing applicants 
for membership carefully, but also 
in doing what it can to keep its 
membership free of members who 
are subject to criticism for either 

[36] 



dishonest or unsafe practices. No 
association is without members who 
are the subject of unfavorable opin- 
ion, but the Farm Mortgage Bank- 
ers' Association has never failed to 
take immediate cognizance of any 
question of fact and to expel any 
member against whom charges of 
unworthy conduct are proved. 

Next to the establishment of the 
ethics of the business on a high 
plane, the greatest service to the in- 
vestor of the association is its sys- 
tematic endeavor to secure legislation 
favorable to the interests of farm 
mortgage investors. In the matter of 
State legislation, the association is 
aided by the co-operation of State 
associations in many of the States, 
which were formed largely through 
the efforts of the national body. 
These joint efforts have been in- 
creasingly effective, and the result is 
illustrated by the success of the Mis- 
souri Farm Mortgage Bankers' Asso- 
ciation in securing the passage of 10 
out of 22 amendments and new mea- 
sures recommended by the associa- 
tion. Thus the investors' interests in 
nearly every incorporated loan field 

[37] 



are being guarded and advanced by 
the association in this most impor- 
tant department. 
The association's chief concern in 
the matter of Federal legislation has 
centred in the Federal Farm Loan 
Act, which, as at present drawn and 
administered, has not been effective 
in bringing into the system the great 
body of experienced farm mortgage 
bankers. The association is on record 
as "favoring rural-credit legislation 
so far as it may, without violation 
of the constitutional and other vital 
principles of our form of govern- 
ment, and without disregard of eco- 
nomic law, be effected to the common 
advantage of the borrowers and the 
lenders of the country." Since the 
attitude of the association toward the 
Federal Farm Loan Act, as at pres- 
ent drawn and administered, has been 
misinterpreted in some quarters, it 
should be said that the criticisms of 
the association have been directed 
solely against those features of the 
legislation which the mature experi- 
ence of the best minds in the associ- 
ation and some of the best legal 
minds in the country believe to be 
[38] 



contrary to both economic and con- 
stitutional law, and therefore sub- 
versive of the public welfare. It re- 
mains to be seen whether or not 
success will attend the association's 
efforts to broaden the scope of the 
act so as to make it helpful in intro- 
ducing into the entire field of farm 
mortgage banking better standards, 
greater economies, and wiser State 
legislation in the interest of both 
lender and borrower. 

In addition to these important fields 
of activity, the association has con- 
cerned itself with promoting pub- 
licity of the true facts regarding the 
rural-credit situation in the United 
States. The promotion of sound 
public opinion on the subject of rural 
credits is of great importance to the 
investor in farm loans, as it is the 
best protection against the damag- 
ing action of demagogues and theo- 
rists. 

The secretary of the association, 
who can be addressed at the head- 
quarters, 417 Merchants Loan and 
Trust Building, Chicago, Illinois, will 
gladly refer any one who makes in- 
quiry to the best available printed 

[39] 



matter on the subject. Investors are 
also welcome at the sessions of the 
annual conventions of the associa- 
tion, where many topics of interest 
to the investor are discussed by com- 
petent authorities. The printed pro- 
ceedings of these conventions con- 
tain much material of value to any 
thoughtful investor, and can be ob- 
tained of the secretary of the asso- 
ciation. 

The investor will appreciate the im- 
portant relation between himself and 
the Farm Mortgage Bankers 5 Asso- 
ciation and by his attitude of sym- 
pathetic appreciation contribute to 
the success of the association in 
serving his interests. 



[40; 



LIBRARY OF CONGRESS 



027 292 974 9 



